Financial Review — 2018

Overall performance

Earnings before depreciation for the year ended December 31, 2018 were $38.3 million compared to $32.8 million for the year ended December 31, 2017. The Authority recorded depreciation of $31.3 million in 2018 compared to $29.0 million in 2017, reflecting depreciation of the terminal building, airfield facilities and other assets over their estimated economic lives. After subtracting depreciation, the Authority generated net earnings of $7.0 million in 2018 compared to net earnings of $3.8 million in 2017.

The Authority’s net operating results for the three years ended December 31, 2018 are summarized as follows:

Results of Operations

Operating activities

During 2018, the Ottawa Macdonald-Cartier International Airport (the “Airport”) saw positive passenger volumes with increases of 5.6% over 2017 and 7.8% over 2016. The Canadian economy experienced solid growth with key financial indicators and employment trends moving positively throughout the year with economic forecasts suggesting continued positive trends for 2019, albeit at a slightly slower pace than 2018.

Continued positive trends in population growth, government fiscal and monetary policies and strong employment despite tightening financial conditions should contribute to incremental passenger growth in 2019 and beyond. Nevertheless, the impact of unpredictability in energy prices, increasing short term interest rates, variability in the Canadian dollar, and evolving political trends nationally in an election year and throughout global markets will be monitored over the course of the coming year.

The following table summarizes passenger volumes for the last three fiscal years:

Domestic passenger volumes were 4.9% higher on a year over year basis with increases in flows noted to Vancouver, Edmonton, Toronto, Fredericton and Saint-John.

Transborder volumes have increased 11.3% as compared to 2017. United increased capacity to Newark, Washington-Dulles and Chicago. American increased frequency to Philadelphia. Air Canada experienced higher frequencies to Newark, Tampa and Orlando while WestJet decreased capacity to Florida (Fort Lauderdale, Fort Myers, Orlando and Tampa).

International traffic increased 2.5% as compared to 2017. Air Canada experienced increases in flows to its Mexican itineraries as compared to the prior year while Sunwing saw higher frequencies to warm weather destinations.

By sector, a quarterly view of 2018 passenger volumes compared to comparable quarters in 2017 is as follows:

By quarter, total passenger volumes were as follows:

The size of an aircraft (based on maximum takeoff weight) and the number of “landed” seats on an aircraft (regardless of whether those seats are occupied by passengers) are the most significant drivers of aeronautical revenue. In 2018, the number of landed seats increased by 2.7% as compared to 2017. Domestic landed seats increased 2.0% on a year over year basis and transborder and international increased by 8.5% and 1.4%, respectively. Variances by sector mirror largely the variances experienced in passenger volumes as explained above.

Revenues

Total revenues increased by 4.1% to $138.1 million in 2018 compared to $132.6 million in 2017.

Airport improvement fee (“AIF”) revenues of $54.2 million in 2018 increased by 3.8% from $52.2 million in 2017. The increase is attributed to the 5.6% year over year increase in passenger volume in 2018 offset by a lower average number of departing passengers originating their flight in Ottawa in 2018 at 94% as compared to 96% in 2017. Passengers connecting through Ottawa are exempt from the AIF. Under an agreement with the air carriers, AIF is collected by the air carriers in the price of a ticket and are paid to the Authority on an estimated basis, net of air carrier administration fees of 6%, on the first of the month following the month of enplanement of passengers. Final settlement based on actual passenger volumes occurs at the end of the month following the month of enplanement.

At $42.0 million in 2018, total aeronautical revenues, which include terminal fees, loading bridge charges and landing fees charged to air carriers, were 4.0% higher than revenues of $40.4 million in 2017. The year over year increase reflects the benefit of the 2.7% year over year increase in landed seats combined with the increase in aeronautical rates and charges of 2.5% effective February 1, 2018. For 2019, the Authority has strived to balance operational expense growth with revenue growth while continuing to monitor ongoing cost pressures resulting from uncontrollable increases that are beyond inflation. Forecasted passenger growth in 2019 combined with prudent fiscal management are expected to offset these increased expenses and accordingly, the Authority is holding its 2019 aeronautical rates and charges at 2018 levels.

Concession revenues of $15.3 million increased 7.3% as compared to 2017. Strong passenger volumes favourably impacted the various concession areas with solid results in food services, car rentals, retail and duty free concessions. In particular, the Ground Transportation segment experienced favourable transaction volumes in taxi brokerage and private transportation company services.

Car parking revenues increased to $16.1 million from $15.3 million in 2017, an increase of $0.8 million or 5.0%. The year over year increase was attributable to continued strength in online and long-term transaction volumes combined with the year over year impact of parking rate price increases in February 2018. The ongoing effort to adjust the rate structure is based on optimizing pricing models and revenues based on passengers’ profiles and their specific needs as domestic passengers tend to park for shorter periods for business purpose day-trips while leisure, transborder and international passengers tend to park at the Airport for longer periods of time.

Land and space rental revenues of $6.6 million increased 2.6% as compared to 2017. Increases are attributable to favourable lease renewal activities with existing tenants and   inflationary adjustments embedded within land leases.

Expenses

Total expenses before depreciation of $99.8 million in 2018 was the same as in 2017.

Interest expense reflected in the statement of operations results from borrowing to invest in the Authority’s capital programs and offset by interest income earned on bank and investment account balances. Interest expense has decreased $3.5 million in 2018 due to the maturity and repayment of the $200 million Series D Revenue Bonds on May 2, 2017.

Rent payable to the Government of Canada increased by 9.6% to $10.6 million in 2018 due to higher revenues. The Authority operates the Airport under the terms of a ground lease (as amended, the “Lease”) with the Government of Canada that sets out the formula for calculating annual rent. The amount reflected as rent expense is estimated based on that formula. The formula calculates rent as a royalty based on a percentage of gross annual revenues on a progressive scale. Rent is calculated as a percentage of gross annual revenues as defined in the Lease, with no rent payable on the Authority’s first $5 million in annual revenue and an increasing rent percentage payable as revenue increases, on a cumulative basis. Rent is levied at a maximum 12.0% rate on annual revenues in excess of $250 million as follows:

Based on the Authority’s projections, estimated rent payments under the Lease for the next five years are as follows:

The cost of materials, supplies and services increased to $38.7 million in 2018 as compared to $37.0 million in 2017, an increase of 4.8%. The $1.8 million increase over 2017 is due to annual rate increases in contracted services in 2018 for policing and security, building cleaning, maintenance and other outsourced and professional services together with increases in repair, utilities and airfield maintenance expenses. Significant snow events early and late in 2018 and a mixture of complex weather conditions required more airfield maintenance including fuel, winter maintenance chemicals and materials than experienced in 2017.

The cost of salaries and benefits increased $0.7 million to $24.4 million in 2018, an increase of 2.7%. The increase was a result of contracted increases for salaries and related benefits, the successful hiring of planned new and replacement positions combined with higher usage of seasonal on-call staff and overtime as a result of more snow events and complex weather conditions throughout 2018.

Payments in lieu of municipal taxes have increased by 2.0% and reflect the prescribed impact of the provincial legislation, which dictates the calculation of this payment. Under this legislation, payments in lieu of municipal taxes are based on a fixed legislated rate for the Authority, multiplied by the previous year’s passenger numbers, but to a maximum increase of 5.0% over the previous year’s amount. The $5.2 million paid for 2018 reflects this prescribed calculation given that the number of passengers travelling through the Airport in 2017 increased 2.0% over 2016 levels. Payments in lieu of taxes will increase in 2019 by the maximum of 5.0% from the 2018 amount based on this prescribed calculation reflecting the increase in passenger volumes that occurred in 2018.

Depreciation reflects the allocation of cost over the useful life of the assets and investments in property, plant and equipment. In 2018, depreciation of $31.3 million was $2.4 million higher than 2017. The incremental depreciation is related to capital projects completed in 2018 and in 2017 including departure check-in upgrade, apron and taxiway reconstruction and expansion, non-passenger screening – vehicle facilities, major fleet vehicles, apron drainage, runway approach lighting and information technology initiatives.

Summary of quarterly results

The Authority’s quarterly results are influenced by passenger activity, aircraft movements, maintenance project decisions, and other factors such as weather conditions and economic conditions and do not necessarily fluctuate consistently over time based on the season. Due to these external factors, the historic results on a quarterly basis cannot be relied upon as a predictor of future trends.

Selected unaudited quarterly financial information for the eight most recently completed quarters is set out below:

Capital expenditures

In accordance with the Authority’s mandate, all earnings are retained and reinvested in Airport operations and development, including investment in property, plant, and equipment to meet ongoing operating requirements.

During 2018, the Authority invested $37.0 million in its capital expenditure programs. This includes significant spending of $13.6 million on apron and taxiway reconstruction and expansion, $5.1 million on terminal and combined services building improvements, $3.6 million on major fleet vehicles, $2.3 million in development costs related to CATSA screening and LRT station projects, $2.1 million on the departure check-in upgrade, $1.8 million on fixed bridge window replacement and $1.1 million on runway lighting.

Contractual obligations

In addition to rent payments noted above, the Authority has operating commitments in the ordinary course of business requiring payments, which diminish as contracts expire as follows:

The Authority’s cash and cash equivalents increased by $1.0 million during 2018 to $30.5 million as at December 31, 2018.

The Authority issues revenue bonds (collectively, “Bonds”) under a trust indenture dated May 24, 2002 (as amended or supplemented, the “Master Trust Indenture”) setting out the terms of all debt, including bank facilities and revenue bonds. Under the Master Trust Indenture, the Authority is required to maintain with the trustee under the Master Trust Indenture (the “Trustee”), a debt service fund (“Debt Service Reserve Fund”) equal to six months’ debt service in the form of cash, qualified investments or letter of credit.  At December 31, 2018, the balance of cash and qualified investments held in the Debt Service Reserve Fund for the Series B Amortizing Revenue Bonds was $6.6 million. Furthermore, in order to satisfy the Debt Service Reserve Fund requirement for the Series E Amortizing Revenue Bonds, $5.9 million of the Authority’s Credit Facility had been designated to an irrevocable standby letter of credit in favour of the Trustee.

The Master Trust Indenture also requires that the Authority maintain an operating fund (“Operating and Maintenance Reserve Fund”) in an amount equal to 25.0% of defined operating and maintenance expenses for the previous year. This fund may be maintained in the form of cash and investments held by the Authority or the undrawn availability of a committed credit facility. As at December 31, 2018, $15.8 million of the Authority’s Credit Facilities had been allocated exclusively to the Operating and Maintenance Reserve Fund.

At December 31, 2018, the Authority was in full compliance with the provisions of its debt facilities, including the Master Trust Indenture provisions related to reserve funds, the flow of funds and the rate covenant.

During 2018, S&P Global and Moody’s reaffirmed the Authority’s credit ratings with stable outlooks in respect of the Authority’s Bonds under the Master Trust Indenture at A+ and Aa3, respectively.

Balance sheet and other highlights

The Authority’s accounts receivable of $8.6 million decreased by $0.8 million from the prior year and was due to the receipt of a payment from one major carrier in late December 2018 instead of receiving the payment early in January 2019.

Accounts payable and accrued liabilities increased by $3.7 million to $18.6 million at December 31, 2018 and was due to higher accrued liabilities as a result of the completion of several capital projects at the end of 2018 together with some higher trade payables.

The Authority’s pension plan purchased a fully indexed buy-in annuity contract late in December 2018 for all retired members as at December 31, 2018. Favourable market conditions allowed for a $2.7 million reduction in the pension plan’s solvency liability by while also de-risking future defined benefit pension obligations for retired members.

Risks and uncertainties

Aviation Activity

The Authority will continue to face certain risks beyond its control which may or may not have a significant impact on its financial condition. Airport revenue is largely a function of passenger volumes. Passenger volumes are driven by air travel demand. The events of the past several years have emphasized the volatile nature of air travel demand and the impact of external factors such as economic conditions, health epidemics, geopolitical trends, government regulation, price of airfares, additional taxes on airline tickets, leakage of passengers to nearby airports, alternative modes of travel and the financial uncertainty of the airline industry.

The financial uncertainty of the airline industry, although currently relatively stable in Canada, remains an ongoing risk to the Authority. This is mitigated by the fact that approximately 94% (96% in 2017) of the passenger activity originates or terminates at the Airport, as opposed to connecting through the Airport. Connecting passenger volumes are more vulnerable to fluctuation due to routing and scheduling changes by airlines. In addition, a greater percentage of the traffic through the Airport is business and government travellers, whose travel decisions are less discretionary than those of leisure travellers.

Aviation Liability Insurance

The availability of adequate insurance coverage is subject to the conditions of the overall insurance market and the Authority’s claims and performance record. The Authority participates with an insurance buying group that also includes airport authorities from Vancouver, Edmonton, Calgary, Winnipeg, Montreal, and Halifax. This group has been successful in placing all of its insurance needs.